Finance Ministry Weighs LTCG Tax Cut Below 12.5% and Dollar-Denominated Gains for Foreign Portfolio Investors
The Union Ministry of Finance is considering significant overhauls to India’s capital gains tax regime in the run-up to Budget 2027–28, including cutting the long-term capital gains (LTCG) tax below its current 12.5% rate for both domestic and foreign investors. Policymakers are also weighing a mechanism allowing Foreign Portfolio Investors (FPIs) to compute and pay taxes on capital gains in US dollar terms rather than Indian rupees, eliminating tax liabilities arising purely from currency depreciation.
The discussions follow a challenging two-year period during which benchmark equity indices have moved largely sideways, coinciding with sustained foreign capital outflows and subdued wage growth across the private sector.
Key Catalysts Driving the Review
Internal deliberations within the government point to two primary pressures forcing a rethink of current market taxation:
- Stagnant Returns Impacting Retail Wealth: Following the post-Covid surge in individual retail participation, millions of middle-class households allocated regular savings into listed equities. According to Prime Database, retail shareholding in NSE-listed companies reached ₹28.97 lakh crore (7.12% ownership) by March 2026, while Central Depository Services Limited (CDSL) registered 19.34 crore investor accounts by September 2026. Two years of zero-to-negative broader market returns have significantly dented household sentiment.
- Domestic Mutual Funds Struggling to Absorb FPI Exits: For nearly a decade, steady domestic mutual fund inflows via Systematic Investment Plans (SIPs) reliably absorbed foreign investor sales. Over recent quarters, however, persistent FPI liquidations driven by higher global interest rates, lofty domestic valuations, and currency volatility have overwhelmed domestic absorptive capacity.
The Push for Dollar-Based Taxation
Under Section 112/115AD frameworks, foreign portfolio investors currently pay capital gains tax assessed in rupee terms. When the rupee depreciates against the US dollar, overseas funds often find themselves paying taxes on paper gains in rupees even if their dollar returns are negligible or negative.
While Section 112 and Section 48 historically offered foreign exchange neutralisation benefits for non-residents on transfers of certain unlisted securities, FPIs trading listed Indian equities have remained excluded from such indexation mechanisms. Shifting to a dollar-denominated assessment would remove currency-drag penalties for foreign funds.
Precedents and Industry Demands
The Centre has previously intervened to relieve tax pressure on cross-border debt allocations. In June 2026, the government scrapped withholding taxes as well as short- and long-term capital gains levies on foreign institutional investments in sovereign green and government bonds under the Fully Accessible Route (FAR) and General Route to arrest currency slides and draw institutional debt flows.
Market veterans and institutional bodies have urged similar clarity for equities. In an October report, State Bank of India’s economic research wing (Ecowrap) suggested abolishing LTCG on equity while extending the minimum holding requirement to two or three years to anchor foreign money into long-term assets rather than speculative trading. Market veteran Vallabh Bhanshali of Enam Group has likewise called for revoking LTCG on overseas institutions to restore India’s parity against competing emerging markets.
While a formal decision remains subject to inter-ministerial evaluations ahead of the upcoming Union Budget, senior officials confirmed that tax cuts and computation adjustments remain actively on the table to revive secondary market liquidity and corporate fundraising.
